Ahead of US elections, surging virus cases and in light of a fresh lockdown in England, you would have thought the markets would be lower today. Well, that’s how things started with stock index futures gapping lower overnight, crude oil dropping 4% and the pound slipping to its lowest level since early October. However, things then started to turn around sharply and by mid-morning UK time, it was a sea of green for the major indices, while crude oil had trimmed its losses and the GBP/USD had nearly turned positive on the day.
It will be interesting to see whether stocks will be able to hold onto their gains amid more lockdowns in Europe, rising new virus cases and deaths, and not to mention the fact it will be US presidential election tomorrow. I would be very surprised if investor appetite for risk does not decrease.
In terms of US presidential election, more than 60% of votes have already been cast. Joe Biden is still enjoying a clear national lead over Donald Trump, with one day to go until the election. But he holds a narrower 6-point advantage in battleground states, according to a Wall Street Journal/NBC News poll. As both candidates will opt for big increases in fiscal spending over the coming months, investors don’t seem too bothered about who will win. The markets will prefer a clear outcome – although this may not be the case. The biggest risk as far as I am concerned is if the outcome of the election is contested. If this potential result comes to fruition, it could trigger a big sell-off for stocks and other risk assets, and send safe haven dollar and yen higher.
Fed won’t do anything, but BoE could increase QE in light of fresh lockdown
A couple of days after the election, the Fed will announce its latest policy decision on Thursday. I am almost certain the Fed will not increase monetary support further – unlike the Bank of England, also meeting on Thursday. More on the BoE in my next report, but whichever candidate wins the US election, they will push through more fiscal support for the US economy, something which the Fed has been calling for anyway. With more fiscal support on the horizon, the Fed will probably want to keep hold of some ammo in case things turn very ugly in the future.
Heightened volatility
With the week also including key data and central bank meetings, as well as US election, there is a lot that could potentially go wrong for risk assets. Heightened uncertainty potentially means more volatility. There is little doubt in my mind that there will be some investors who will use today’s bounce to close out more of their long exposures in equities and other risk sensitive assets. So, I will not be surprised if this rebound fizzles out, potentially as early as later this afternoon.
Dow Jones holds 200-day for now
Today’s rebound can also be explained way by technical buying above Friday’s hammer that was created on the daily chart of the Dow, which found good support from the 200-day average at the end of last week. However, the index has been created lower lows and lower highs in over the past several weeks. So, the trend is somewhat bearish and for that reason I am on the lookout for a bearish signal to emerge soon. This could be formed in the shaded resistance zone, or if the index were to go back below Friday’s high, as that would point to bulls being trapped.
